Not that long ago, I’m sure you remember, the Organization of Petroleum Exporting Countries, better known as OPEC, controlled the international price of crude oil.
Given its effective control over more than 40% of all oil produced daily worldwide, how much (or little) the cartel decided to move into the market was the single biggest factor in setting the worldwide price.
In fact, in 1973, in the wake of the Yom Kippur War between Israel and the Arab coalition, OPEC was able to bring the West virtually to its knees, enacting an oil embargo by way of punishing major Western powers for their support of Israel in the conflict.
Of course, in those days, the United States was dependent upon foreign producers for almost 70% of the oil the country needed daily.
It had become both an economic and a national security concern, and “energy independence” was the preoccupation of American presidents going back to Richard Nixon. More than 60% of all domestic production was coming from stripper wells – wells producing fewer than 10 barrels a day each.
But then the combination of hydraulic fracturing and horizontal drilling ushered in a genuine “American energy revolution” in oil production.
The opening of shale (along with the broader tight) oil and natural gas production revolutionized the industry. Over the past decade, something truly unusual developed.
American domestic oil production became the balance for global supply and demand.
From barely 4 million barrels a day in 2008, extractions in the United States have now reached a record 11 million barrels, with some estimates expecting a rise to 12 million by 2020.
That would catapult domestic production into the number one position worldwide.
Then, as part of a budget agreement in mid-December 2015, Congress ended a more than four-decade prohibition on exporting U.S. crude to international markets. Just as the shale revolution was gaining steam, the added volume coming started moving out to higher-priced foreign markets.
American oil production has become the fulcrum on which international oil trade operates.
King Shale has been crowned. Let me show you what this means…
American Energy Dominance: The Rule, Not the Exception
Unlike other new sources of oil – the North Sea being a good example – the U.S. shale largess is not likely to be ending any time soon. Initially, it was thought the flow would begin drying up in 10 to 15 years. The latest estimates have now pushed that back to 40 to 50 years.
Several reasons have emerged allowing for this longer-term and more expansive view.
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Large amounts of additional extractable reserves have been discovered. Longer frac segments, better proppants (to keep rock fissures open, thereby allowing improved recovery rates), multiple well spuds from the same platform, significant reductions in well head costs, and a better ability to gauge the effect of rising volume on prices have also contributed.
Geological surveys indicate that other countries – China, Argentina, Russia, and even Algeria – might have more shale reserves than the United States. But it will take years for other parts of the world to begin producing shale and tight oil in any significant amount.
That means American producers will be leading the way for some time to come.
The first time around, shale oil and natural gas minted a bunch of new millionaires. But this time around the prospects are even better.
Welcome to the Second American Energy Revolution
This change is taking place as oil prices accelerate. With access to international markets and a more efficient, focused production base, the United States will be setting the global pricing picture.
That means select domestic producers having efficient operations, experienced management, completed infrastructure, and wholesale drawdown agreements in place; ready access to transport; an ability to offset extractions with reserves in the ground; and focusing on an already operating, producing well network in high-volume basins will be providing investors with returns much better than the sector as a whole.
Unlike the period from late 2014 through 2016, the climate today is much different. Then, the Saudis had led OPEC into defending market share rather than price. That translated into a collapse in global oil prices.
That period is over.
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An ongoing OPEC–Russian agreement to limit production, significant declines in major producers – like Venezuela, Libya, and Nigeria, and spot shortages from Canada and Mexico, along with a permanent North Sea production cut and indications that mature Russian basins have begun sliding down the declining side of the curve – are all contributing to a tight market.
The United States continues to hold all the cards and will be serving as the global arbiter of oil pricing moving forward.
That puts the group of lean, niche producers my Energy Advantage subscribers having been making nice money off of firmly in the drivers’ seat.
In fact, it’s likely there may be more money to be made moving forward than at any time during my four-plus decades in this business.
The concurrent “green” energy revolution is no threat to these profits, either.
You see, this will be unfolding despite the diversification in energy sourcing internationally. Much has been made of advances in renewables, smart grids, and electric vehicles. Such developments are certainly underway, and many of them have the potential to be every bit as lucrative as shale.
What is underway is a genuine expansion in reliable energy coming from separate sources. Yet for the next thirty years at least, the world will rely on crude oil, natural gas, and coal as the three dominant sources of energy.
Hydrocarbons still have the central position in the equation.
And with the balance of production and exports gravitating to a choice set of U.S. shale operators, this is the perfect time to be an American energy investor.
Note: Kent’s paid-up Energy Advantage subscribers are getting full access to his research into a $1.4 trillion shale “motherlode” in the U.S. desert southwest, and what he believes is the best way for investors to play it. Click here to learn how to get access.
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